When preparing their 2019 tax returns, construction companies and their shareholders should consider the impact of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Disaster Act) and the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which are both part of the Further Consolidated Appropriations Act of 2020 (H.R. 1865, P.L. 116-94).1

Disaster Act

Signed into law on December 20, 2019² and often referred to as the “extenders bill,” the Disaster Act extends over 30 code provisions that expired (or were set to expire) through 2020. Let’s look at a few that could impact the commercial contractor and construction company shareholder-owners.

Tax Credits for Construction Businesses

It is important to recognize that credits are a direct reduction against the tax liability, whereas deductions are an offset against the taxable income that is multiplied by the applicable tax rates. A credit is therefore worth more in tax savings than a deduction, even after adding back the wages (or other expense) deduction.

Empowerment Zones
Businesses located or operating within an empowerment zone and that also have W-2 employees living within an empowerment zone are eligible for specific tax incentives, including:

• A credit of 20% of the first $15,000 of qualified wages;³
• Special §179 expensing rules whereby an extra $35,000 of expensing is permitted along with an increase to the phase-out computation;⁴ and
• Capital gain deferrals on the sale of qualified assets that are sold and replaced.⁵

The empowerment zone designations originally expired at the end of 2017 but have been extended through December 31, 2020 under the Disaster Act.⁶ The key here is for the contractor to identify both the jobs located in a federal empowerment zone and which employees also reside within an empowerment zone.⁷ The first $15,000⁸ of qualified wages for zone residents who also work on jobs within a zone are then multiplied by 20% to determine the tax credit. As with many labor-based credits, the contractor adds back the wage deduction in exchange for the credit.

Work Opportunity Tax Credit
For several decades, the Work Opportunity Tax Credit program provided incentives for businesses and contractors to hire individuals who may face difficulty gaining employment. Hiring (and timely documenting) these new employees’ circumstances permits a general business credit that is extended by the Disaster Act through 2020.⁹